CONCLUSION: Because we think the BOJ will keep its balance sheet on hold over the immediate-to-intermediate term, as well as our models pointing to a negative inflection in Japanese growth in 3Q, we are inclined to short Japanese equities over the intermediate term – ideally nearer to TREND resistance on the Nikkei 225 Index/on any pending TRADE line breakdown.


Not to be confused with something better reserved for an ultimate fighting octagon, the title of this note suggests that we think the solid Tankan report out of Japan overnight is additive to our view that the BOJ will maintain its reluctance to pursue incremental monetary easing over the immediate-to-intermediate term (next meeting JUL 11-12). Jumping back to the BOJ’s own Tankan Survey, the survey results suggest that the intermediate-term outlook for the Japanese economy is quite positive – at least relative to both conditions and expectations 3-6MO ago. 

  • 2Q Tankan Survey:
    • Large Manufacturers:
      • Sentiment: -1 from 4
      • Outlook: 1 from -3
    • Large Non-Manufacturers:
      • Sentiment: 8 from 5; highest since 2Q08
      • Outlook: 6 from 5; highest since 2Q08
    • All-Industry FY CapEx Growth Guidance: 4% from -1.3%; highest since 4Q07! 





Our view that the BOJ is unlikely to ease in the immediate term stands in contrast to a growing consensus view that the BOJ is looking to expand its balance sheet at the current juncture – irrespective of the data!:


“I expect the BOJ to ease in July even after a slightly better Tankan. I don’t think it’s that relevant right now to what the BOJ is trying to do, which is to reach its inflation target. We have two new members from the private sector. They are much more sensitive to market sentiment.”

-Naomi Fink, head of Japan strategy at Jefferies Japan Ltd.


While we agree with Fink’s view that the new members on the BOJ board heighten the probability of BOJ balance sheet expansion (we made that call back on MAR 2nd), we think there is a case of Duration Mismatch to be exploited here, as both recent economic and financial market trends, as well as the BOJ’s own commentary are likely leading indicators of further BOJ inactivity for the time being.


From an economic data standpoint, recent trends in Japan’s external sector, consumer sector and manufacturing/production sector are quite positive, on balance, though it is fair to note that the most recent of the data points do show negative inflections in  the survey data (PMI, Economy Watcher’s) and in Capacity Utilization. With that being said, however, it is our view that the BOJ’s inability to meet its Asset Purchase Program targets in 10 straight operations and its own guidance from its previous meeting (APP left unchanged in JUN) will combine with the Tankan Survey results to overshadow the aforementioned inflections and keep them on hold for now.


“Japan is expected to return to a moderate recovery path as overseas economies emerge from the slowdown.”

-Statement from the JUN BOJ Monetary Policy Meeting










A chart of Japan’s 5yr breakeven inflation rate – the slope of which having materially inflected in recent weeks – tells you all you need to know about expectations in Japan’s bond market for further BOJ balance sheet expansion over the immediate-to-intermediate term.




In light of our below-consensus expectations for global growth – particularly in economies where Japan is exposed to on the export front (China = 19.4%; US = 15.7%), we think the  BOJ remaining on hold is marginally positive for the Japanese yen. That view is consistent with what we’ve been publishing in our recent notes on Japan, namely highlighting our anticipation of JPY strength on a TRADE and TREND basis within the context of our TAIL-duration bearish thesis on the currency (vs. the USD). Unless this time is different, further yen strength from here will be yet one more bearish factor for Japanese equities over the intermediate term (in addition to a negative inflection in growth in 3Q and delayed implementation of further monetary easing – i.e. no more “drugs” for now).






All told, because we think the BOJ will keep its balance sheet on hold over the immediate-to-intermediate term, as well as our models pointing to a negative inflection in Japanese growth in 3Q, we are inclined to short Japanese equities over the intermediate term – ideally nearer to TREND resistance on the Nikkei 225 Index/on any pending TRADE line breakdown. Our risk management levels are included in the chart below.


Darius Dale

Senior Analyst




Still treading water


M&A and Other Trends for Q2 2012

  • Q2 2012 US hotel transaction volume was a meager $1.5 billion, up from Q1 2012's $1.0 billion, but down significantly from Q2 2011's $4.0 billion.  
    • The number of US hotel transactions in Q2 2012 almost double that in Q1 2012
    • US average price per key (APPK) in the Upper Upscale segment rose 24% QoQ
    • Non-US APPK in the Upper Upscale segment jumped because of the sale of Novotel Nathan Road Kowloon Hong Kong, the largest single hotel transaction in Hong Kong recorded in the last 11 years
    • All of the luxury transactions occurred outside of the US
  • There were four portfolio deals including Blackstone's purchase of Accor's Motel 6 unit
  • According to Fitch, May hotel delinquency rate was 11.15%, higher than April's 10.20%.  The higher hotel delinquency rate was partly due to the inclusion of the Marriott Waikiki to the hotel index.  The delinquency rate remains below the 14% seen in Q3 2011.










  • Macau managed only 12% YoY growth in June of 2012 despite an easy hold comparison – the typhoon took out most of last Friday’s revenues
  • Given the difficult July comp, it may be difficult for Macau to eke out a double-digit gain this month
  • September could be a big month with the easy hold comparison and opening of additional amenities at SCC.  However, the market faces difficult comps until February.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Our Growth Slowing call has been consistent since March (we shorted XLI on March 12th).


From our purview, the global economy is still feeling the ill-effects of the +13.6% run-up in global crude oil prices (Brent) from JAN 25 to its MAR 16 YTD peak (among other things, of course). As we penned in the Early Look on JAN 26 – the day our central planning chairman Ben Bernanke decided to extend ZIRP to 2014 and, thereby, reigniting the Inflation TradeGrowth Slows as Inflation Accelerates. Our process hasn’t changed (i.e. analyzing and forecasting deltas and noteworthy inflections in GROWTH, INFLATION and POLICY).


This morning we received additional evidence supporting the fact that economic growth continues to slow domestically. The Institute for Supply Management reported its monthly survey results this morning and the Manufacturing survey came in at 49.7. This is the lowest reading since JUN '09 and well below the consensus view of 52.2. Further, a reading below 50 implies a contraction (versus expansion) within this sector of the economy.


In addition to the ISM number in the U.S., we've had a slew of additional economic data points globally that continue reinforce that economic growth is tepid at best and that the great US decoupling is not really occurring. These JUN data points are as follows: 

  • Eurozone Manufacturing PMI: 45.1 from 44.8; and
  • China Manufacturing PMI: 50.2 from 50.4; HSBC Index: 48.2 from 48.4;
  • South Korea Manufacturing PMI: 49.4 from 51;
  • Australia Manufacturing PMI: 47.2 from 42.4;
  • Taiwan Manufacturing PMI: 49.2 from 50.5;
  • Vietnam Manufacturing PMI: 46.6 from 48.3; and
  • Brazil Manufacturing PMI: 48.5 from 49.3. 

Whether or not this morning’s unfriendly reminder of the state of the global economy opens up the door for more stimulus at these prices remains to be seen, however. In this era of increasing short-termism out of both elected officials and stock market operators, the AUG 1 FOMC meeting seems like a lifetime away. There’s a great deal of risk to be managed between now and then. Our updated SPX levels are included in the chart below.


Darius Dale

Senior Analyst



Tailspin: Going Bearish On Pawn Shops

Pawn shops and gold buyers have been on a huge tear over the past two years. It appears that everywhere we drive, someone has put up a “BUY GOLD” sign. The whole fanatical attitude over pawn shops is fading fast and as a result, we are reiterating our bearish case for names like CSH, EZPW and FCFS in the back half of 2012.


Essentially, gold prices are weakening along with volumes. While EZPW and CSH hedge their gold prices (out 3 months and 6 months, respectively), FCFS does not. For gold-sensitive lenders, the current reversal in commodity prices does not bode well for future earnings. Additionally, customers are running out of gold to pawn. Most gold has been purchased by pop-up gold buyers and thus ends up as scrap. This does not bode well for the pawn shops operating actual loan agreements with gold as collateral.



Tailspin: Going Bearish On Pawn Shops  - PAWNS revrisk



We bring to your attention a paragraph from a note our financials team put out July 2:


Gold averaged $1,602/oz in June, up 4.8% YoY and up 0.8% from the average price in May of $1,590. In the second quarter gold averaged $1,613/oz, which is 6.8% higher than comparable period last year. This is a marked slowdown from the first quarter's year over year growth rate of 22%. Holding gold at its current price of $1,604 would imply a YoY decrease of 7.0% in 3Q12 and a negative 5.0% YoY change in 4Q12. This will be in addition to negative gold volume trends running in the mid-to-high teens for EZPW and FCFS on a per store basis. Consensus revenue expectations do not reflect this dynamic. This will be the slowest gold price tailwind for the sector in 12 quarters (since 2Q09).


When the quantitative setup is right, we will go short pawns. Post-summer numbers should highlight the difficult environment that lies ahead for pawn lenders.



Tailspin: Going Bearish On Pawn Shops  - PAWNS goldcomps

European Banking Monitor: Banks and Sovereigns Diverge

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:

 * One week ago we published our risk monitor with the title "Risk Cooling Off, For Now". While that didn't seem to be the case on Monday of last week, it certainly played out over the remainder of the week. This morning, we're struck most by the divergence between sovereign and bank default swaps in Spain and Italy. The strength in the sovereign swaps is reflecting the perceived progress made at the EU summit to directly recapitalize the banks. However, you'd expect to see that reflected in reduced default expectations at the banks themselves. This wasn't the case, however, as Spanish and Italian bank CDS was broadly wider last week.  



 If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst




European Financials CDS Monitor – The most interesting takeaway in this week's risk monitor is that the Spanish and Italian banks swaps were broadly worse week over week, while the sovereign default swaps were much tighter. Considering that the strength in the sovereign swaps was reflecting the plan to directly recap the banks through the ESM, we find it surprising that the individual company default probabilities seem not to have noticed. Overall, 22 of the 39 European financial reference entities we track saw spreads tighten last week. The median tightening was 0.5% and the mean tightening was 1.2%. 


European Banking Monitor: Banks and Sovereigns Diverge - aaa. banks


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. Last week, the Euribor-OIS spread tightened by 1 bp to 42 bps.


European Banking Monitor: Banks and Sovereigns Diverge - aaa. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  As the chart shows, European bank reliance on the ECB remains exceptionally high.


European Banking Monitor: Banks and Sovereigns Diverge - aaa. facility


Security Market Program – For the sixteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/29, to take the total program to €210.5 Billion. Could this position of hold change? We think the ECB has to take a larger role to buy Europe’s sovereign peripheral paper. We’ll be looking to this Thursday’s ECB meeting for any information on a change of positioning.


European Banking Monitor: Banks and Sovereigns Diverge - aaa. smp

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